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CBS Deals a Blow to Comcast, but Comcast Could Have the Last Laugh

CBS will be the beneficiary of a positive news cycle, but this is not a game-changer --regardless of what the media says.

CBS All Access probably isn't the game-changer unbundlers are hoping it will be. Source: CBS

This week, CBS(NYSE:CBS) joined Time Warner's HBO in the race toward unbundling by offering a streaming, Internet-only service that allows subscribers to watch current and past shows on demand. It is still early; but if the market is of any indication, pay-TV providers are not happy with these developments. Mega-provider Comcast(NASDAQ:CMCSA) lost 2% of its market capitalization that day. Right now, it seems the unbundling, a la carte crowd is closer to its ultimate goal of menu-based pricing.

That said, should Comcast investors have something to fear? In light of current events, probably not. Although the situation is fluid, and thus subject to change, the unbundling model under CBS' vision has two large problems: price and the availability (or lack thereof) of sports programming. Unless stations solve these problems, pay-TV providers won't only survive, but could emerge from the unbundling trend in a stronger position.

If this is the broad outline of unbundling, Comcast could be a better value than most give it credit for. Source: Comcast

Cable is less expensive than most people thinkAnd while unbundlers point toward a la carte options would give consumers more choice, many consumers are looking at value. Unfortunately, at the price point that's being discussed for CBS, a la carte has a good deal to go in terms of value. By pricing its service at $6 per month, or roughly 9.3% of the average cable bill cost of $64.41, consumers can buy roughly 11 channels for the cost of the average cable bill.

At first site, the average cable bill seems laughably low. Many individuals complain of bills in the range of $150. And it's true that many pay that amount, but in many cases that's because they are paying for added services such as Internet access and wireline telephone (the oft-pushed bundle) or expanded cable packages with added hardware costs (essentially consumer choice).

At this price, do you really want to lose optionality? And while it is true that different channels should charge different prices in order to attract the most eyeballs and recoup their production costs (and make a profit for shareholders), pay-TV providers have already been doing that through metered affiliate fees. Right now, only one cable channel costs subscribers more than $6 per month -- ESPN, at $6.04 -- and many basic packages exclude this channel.

And although paying for direct channels instead of a bundle sounds good, you lose the optionality of watching an occasional channel and stations with "tent-pole" programs would suffer (think: AMC's The Walking Dead). Eventually, less-trafficked channels would have to cut back on programming costs or exit the business because they can't adjust to an unbundled world.

NFL not includedSpeaking of programming, it is noteworthy the CBS deal specifically excludes NFL games. There's a reason why ESPN is able to charge so much per month in affiliate fees: sports and other live events are a powerful moat against cord cutting. The NFL is a ratings juggernaut with ESPN's Monday Night Football game generally winning the ratings war. And although CBS executives stated "they are in discussions," it is noteworthy a deal hadn't been reached before the announcement.

So right now the unbundling crowd has the same issue with the NFL that's plagued cord cutters. Internet-only fans were given hope when it was announced DirecTV's Sunday Ticket would go streaming, and allow access to out-of-market games, but those hopes were dashed when the price of $200 per year was announced in addition to some rather onerous geographical requirements. If the best deal for NFL fans amounts to three months of the average cable bill with no other programming, pay-TV starts to look like a deal.

Foolish thoughtsPersonally, I think the pay-TV model is unsustainable. That said, the broad outline of CBS' channel doesn't appear to be a game changer. When evaluated on a price standpoint, the value just isn't there. In addition, the service lacks the NFL programming that's a deal breaker for many would-be customers. CBS is wise to do it in order to add incremental revenue and a positive news cycle, but don't look for mass pay-TV defections from this move.

Personally, I would have loved to see CBS open up its programming to Hulu Plus along with ABC, Fox, and NBC to build upon its large content and programming base. In short, the channel appears to be creating its own bundle ... and that's what pay-TV providers should fear. Oh, and did I mention Comcast owns 32% of Hulu?

Author

Inspired by the idea of "making your money work for you" at a young age, mostly because he was a lazy child, Jamal parlayed that inspiration into a love of the psychology of markets, competitive advantages, and thematic investing. He later shrug off that laziness, with a career that included stints as a mortgage trainer, a financial advisor, a Sr. Investments Communications Specialist, and a stockbroker. Jamal graduated from George Mason University with a bachelors of science in finance, American University with a masters in finance, and is a CFA charterholder.